Answers To State Income-tax Questions

Benefits Taxed First Where Paid

March 08, 1992

This is the third in a series answering Connecticut residents' questions about the new state income tax. Questions were given to the Connecticut Society of Certified Public Accountants, which distributed them to members. The society advises readers that the answers are for informational purposes only and have not been reviewed by the Department of Revenue Services.

Q. I am a Connecticut resident, but I lived in Rhode Island and am collecting unemployment from Rhode Island. To which state do I pay taxes? A. Income such as unemployment compensation is first taxable in the state in which it is derived. Rhode Island tax is determined as a percentage of your federal tax. Therefore, if a federal return is filed and taxes paid, a Rhode Island rate of 27.5 percent is applied to the portion of federal taxes attributable to Rhode Island-source income.

If any of the unemployment compensation was paid by Rhode Island to you while you were a resident of Connecticut, that portion also would be taxable in Connecticut. Connecticut law provides for a credit to be applied to your Connecticut tax liability on this income, but it is only available to the extent of taxes due in Connecticut on the portion attributable to unemployment compensation.

Answer provided by Michael P. Sweeney, CPA, Bloomfield.

Q. Since my adjusted gross income for federal tax requires me to fill out both the Connecticut 1040 form and Schedule 394 for interest income, am I not being taxed twice on the same interest income? A. For 1991, Connecticut resident taxpayers may be required to file Schedule 394 (capital gains, dividends and interest liability) along with Form CT-1040 (Connecticut resident income-tax return) if the taxpayer's federal adjusted gross income is more than $53,999, or the taxpayer reports net capital gains for federal tax purposes.

As a result, there have been many questions regarding perceived double taxation of net capital gains, dividends and interest for those individuals required to file Schedule 394, since the same items of income are subject to Connecticut income tax on Form CT-1040.

Although it is true that these income items may be reported and

subject to tax on both the CT-1040 and Schedule 394, the rate of tax imposed on each form must be analyzed. For 1990, the rate of tax imposed on interest and dividend income ranged from 1 percent to 14 percent, depending on the taxpayer's adjusted gross income; net capital gains were subject to tax at the rate of 7 percent.

However, the new income-tax law, which became effective Sept. 1, 1991, provided for the phasing out of the tax on capital gains, dividends and interest by reducing the 1990 rates by about one-third and phasing in only one-third of the statutory rate of tax imposed on all income (i.e. 4.5 percent).

Accordingly, rates of tax imposed on income earned during 1991 are 0.75 percent to 9.5 percent for interest and dividends, 4.65 percent for net capital gains and 1.5 percent on all income. For 1992, the capital gains, dividends and interest tax is eliminated, and the income tax becomes fully effective at the rate of 4.5 percent.

Therefore, the result of phasing out the old tax system and phasing in the new income tax is that an adjusted rate of tax is imposed that reflects the portion of the tax year that each taxing system was in effect.

Answer provided by David Fonda, Deloitte & Touche, Hartford.

Q. How much can you deduct for job-search expenses: travel, gas and mileage? And where can you deduct it on your forms? A. An individual is allowed a federal deduction for the expenses of seeking new employment in the same trade or business as the individual's current employment, regardless of whether the new job is secured.

If the individual is unemployed and is seeking new employment, his trade or business is generally the service performed for his past employer. An individual seeking a new job or switching his trade or business will be denied a deduction. Job-search expenses may include typing, printing and mailing of resumes and local transportation and travel expenses.

Local transportation and travel expenses include meals, lodging, public transportation costs (i.e. bus or cab) and personal automobile costs. To claim these expenses, you must complete Form 2106. The cost of meals is only 80 percent deductible.

Automobile costs may be deducted using one of two methods. One method is to keep an exact record of the amount paid for gasoline, tolls and parking and to calculate an allocable portion of depreciation, insurance and similar costs.

The alternative and simpler method is to use the standard mileage rate of 27.5 cents per mile driven and add to this the cost of tolls and parking. However, the standard mileage rate is available only to those who own their automobiles.

Job-search expenses are deductible as an itemized deduction. Together with other miscellaneous itemized deductions, they are deductible only to the extent they exceed 2 percent of adjusted gross income.